Benjamin Netanyahu and Yariv Levin

Clear and Present Danger
"Don't bring us Israeli companies until we see how the political changes in Israel develop"

The political unrest in Israel and the impending changes to the legal system are beginning to worry investors and companies abroad. Until the picture becomes clearer, some of them are already holding back investments

"Despite my great love for Israel, we will not invest here at this stage, not before the direction of the reform of the judicial system and the discriminatory legislation becomes clear. At the moment, this is a directive from above that stems from the same reasons that we are not investing in Turkey and Hungary," an investment executive at one of the largest European companies told an Israeli entrepreneur. The investor, a Jew himself, is responsible for the corporate investment arm of the company, which in recent years, has made a number of investments in Israeli startups, and invested quite a bit of effort and resources to woo Israeli entrepreneurs, as was common until six months ago.
Now, those investors are sitting on the fence like other investment bodies in Europe waiting to see the developments in the legislation of the new government. "In my role, I locate Israeli and European innovation for international bodies. Last week, we returned from year-end vacations and no less than five companies and funds told me: 'In the first quarter, focus on European startups and don't bring us Israeli companies until we see how the changes in Israel develop,'" Avihai Michaeli told Calcalist. Michaeli is a consultant in the field of mergers and acquisitions and growth investments. "When I asked for the reasons, they answered that the political uncertainty in Israel is the reason they want to wait."
According to Michaeli, these are entities that have collectively invested over $100 million in Israeli high-tech companies in recent years. However, he emphasizes that no decisive decisions have yet been made regarding investments in Israel and it is a matter of temporarily sitting on the fence. If there is no regulatory impediment to investing in Israel after the reforms led by the new government, those entities will return to investing in Israel.
1 View gallery
בנימין נתניהו ו יריב לוין על רקע ההפגנה ב כיכר הבימה תל אביב
בנימין נתניהו ו יריב לוין על רקע ההפגנה ב כיכר הבימה תל אביב
Benjamin Netanyahu and Yariv Levin
(Photo: Yair Sagi,Alex Kolomoisky,Kobi Koanks)
"Uncertainty is never good for investments, but now we are losing twice because the Israeli economy is actually strong compared to other countries in the world," says a high-tech entrepreneur, who requested to remain anonymous. "We could be getting more money now as many investors are quoting the ranking of Economist in which Israel was placed fourth in the list of the most successful economies in the world, but then, as if implicitly, they switch to talking about Silvio Berlusconi and the moves he made in Italy. I can take the hint."
According to him, Israeli entrepreneurs are also already starting to internalize the new signals received from abroad and there are some high-tech companies who are making very initial checks with law firms regarding the possibility of moving their development center abroad.
The trend of curbing investments in Israel comes on the back a global economic slowdown and those who do not want to get involved in political issues can also give a purely economic explanation for the decision not to invest in an Israeli company. Pure capitalists will say that the lust for money will win in the end and this may also be historically true, but there are two significant differences in this regard that have occurred in recent years and may work to the detriment of Israel if the legal system changes and is actually subordinated to the executive and legislative authorities. The first is the widespread adoption of ESG principles, mainly in Europe, which impose government restrictions on activities that do not meet their rules. Along with the desire to maximize profitability, today's managements must act according to clear principles of corporate governance and social consideration, otherwise they will be punished by both their customers and investors. More and more fights against activist investors are being waged today around non-compliance with ESG rules by companies.
The second essential change is the sanctions imposed on Russia a year ago after it invaded Ukraine. Although, of course, this is a far-reaching comparison, this was the first time huge companies ceased operations in a large country at the cost of losing revenue, erasing the investments made over the years and harming growth, all for ideological reasons. If, up until a year ago, exiting an activity in any market in the name of democratic and ideological principles was an almost non-existent and sometimes unimaginable event, today company executives say to themselves that they have experienced the event, gained experience, and therefore it is no longer as scary as it was in the past.
"Entrepreneurs are hearing deep concern from the investors"
$15 billion were raised in 2022 by Israeli high-tech companies, $27 billion were raised in 2021, with most of the money being foreign, mainly American, from institutional bodies, pension funds, academic bodies, etc. To this day, those investors have maintained great sympathy for the local industry in times of war as well as in times of peace. But today, there are signs of concern from many of them who see the processes going through Israel as changes that could affect their willingness to continue investing here. "Yesterday I had an hour-long conversation with an American institutional investor with whom I have been in contact for two months. He did his due diligence on me and the fund and said that our results are excellent. But instead of talking about the fund, half of the conversation yesterday was about the situation in Israel and the news they were hearing," a senior investor in Israeli high-tech told Calcalist.
“Tech company CEOs and boards have a fiduciary duty to protect intellectual property and key core assets, and will only be entrusting those in countries with strong and independent judiciary. The upcoming legislation to dismantle the judicial system in Israel will have severe and irreversible implications on the country‘s position as a business hub," NICE CEO, Barak Eilam, wrote in a Facebook post.
The coming years will not be easy financially not only for the high-tech industry. Ethical instability in Israel and threats to governmental stability will cause many investors to carefully consider continuing or beginning to invest in Israel. Even those who have invested here for years may choose to slow down their involvement. "Every time missiles were fired at us or we were in a conflict over our existence, all the investors expressed support, increased their presence and even offered assistance. Now we mostly hear deep concern," a leading entrepreneur told Calcalist.
It turns out that the restlessness that characterizes local politics and the changes in the legal system in general and the threat to civil rights in Israel in particular cause many institutional investors, venture capitalists, and business people in general to express concern, ask questions that have never been asked previously, and even significantly slow down progress in investments or new initiatives. In a conversation with the same entrepreneur, he explains that the main problem is that most of these investors, even if they choose to change policy, will not declare it publicly, but will simply stop investing here.
"The countries will not make a public declaration, they will simply stop investing"
"The high-tech and investment community in the United States and Europe are very ethically and politically aware," the entrepreneur told Calcalist. "They are used to taking a political stance and are very aggressive. North Carolina passed a law against transgenders and Microsoft and PayPal publicly canceled investment plans in the country in 2016. It is part of their culture. When missiles fell in Israel they were very supportive, when Ukraine was attacked they doubled their donations and they took an ethical position. In today's world there are many alternatives to Israel. Israel's relative advantages are neither forever nor exclusive. There are places more valuable than Israel today."
Another entrepreneur told Calcalist that what happened not long ago with Google and Amazon employees who protested the Nimbus tender could come back with greater force. "Employees will not want to work for Israeli companies if Israel takes non-ethical positions that do not correspond to the spirit of the times. A company that wants to be huge cannot be part of a country that has no values. American employees will not want to work in those companies just as they do not want to work for Hungarian, Russian and other similar companies," says the same entrepreneur.
Many investors told Calcalist that there is another aspect that can significantly affect business activity here. "Multinational companies rank countries according to their level of corruption and the level of business security in the country. The attack on the courts creates real unrest. Many of them have thousands of employees here and significant proprietary assets that they need to feel safe about and they don't today. Investors are already telling us that they will wait a bit or as they defined it: they don't want to put a healthy head in a sick bed."

"Funds have no interest in declaring that they are not investing in Israel. If they are under pressure, they will simply stop actively investing and stop the flow of money - Israel will become a corrupt country at risk," a prominent entrepreneur told Calcalist. "In our world, worry also has a substantial effect on the economy. The threat also creates concern and I see it from investors who bring it up in conversations. When there is an existential threat to Israel, they are very much with us, but when there is a threat regarding values, they take a stand. A threat to the courts for them is a threat to values and business".